August has been a frightening month for oil exporters with no good way to hedge international currency. The U.S. dollar, main unit of exchange in the oil market, has rapidly lost value against the German mark, benchmark for European currencies. At least at first, intervention by central banks in the U.S. and Europe failed to halt the slide.
As usual in an exchange rate jolt, there's no shortage of explanations. Many observers blame the U.S. federal deficit and lack of ready remedies for it. They're no doubt partly correct. A growing deficit does nothing for international confidence in a nation's economy. Confidence, or the lack of it, affects exchange rates.
DEFICIT NOT NEW
But the U.S. deficit didn't suddenly appear. Why didn't the dollar plunge to a record low against the mark last January, for example, before the U.S. economy began its feeble recovery, instead of in the third week in August? Nor did it just now become obvious that U.S. leaders have no instant cure for fiscal ills. Something else must be at work. And indeed something is: unusually intense politics in the U.S., in Germany, and throughout Europe.
In the U.S. the Federal Reserve Bank has been willing to join at least 15 other central banks to buy dollars with marks. It has been less willing to raise interest rates. Higher interest rates would threaten the fragile recovery and reelection prospects for President Bush. Of course, banks quaking under new lending rules haven't exactly lavished credit on business at current rates. In practical effect, the dollar's plunge probably precludes any preelection lowering of interest rates that otherwise might have occurred.
Political forces in Europe work the other way. Germany, especially sensitive to threats of inflation, has strenuously defended the mark. And inflation indeed threatens under the economic strains of German reunification. The German central bank's rigid stance on the mark has raised protests elsewhere in Europe for several months.
Therein lies another political dimension to the problem. Under what's called the exchange rate mechanism (ERM), European central banks are supposed to keep their currencies within certain trading ranges against the mark. It has become increasingly difficult to do so. Other key European currencies, as well as the Japanese yen, have weakened against the mark although not by as much as the dollar. British sterling, for example, was approaching its ERM minimum level against the mark, forcing Treasury and Bank of England officials at least to consider raising interest rates in the midst of a recession.
CAUGHT IN A CROSSFIRE
At any other time, Europeans caught in this crossfire between the dollar and mark might have disengaged from the ERM by now. But the ERM functions as a proxy for monetary union embodied in the Maastricht Treaty, the crucial next step in European commercial unification. That treaty, rejected earlier this year in a Danish referendum, faces an uncertain fate in an important French referendum next month. With unification politics increasingly touchy in France and elsewhere, ERM mischief might represent a proverbial last straw.
Currency upsets have a way of correcting themselves before international companies figure out how to deal with them. That bold generality is no excuse for ignoring the economic perils that certainly contribute to current dollar mark troubles. But it is no less true that currency movements of the moment are leveraged to an unusual agree against politics. For an internationally dispersing industry, politics is an increasingly familiar piece of the commercial puzzle.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
